To mitigate the risk of over-concentrating assets domestically and increase their potential for greater and diversified returns, high net worth investors are increasingly taking advantage of their R11 million allowance to invest outside of South Africa.
While the diversification of assets remains the main strategic reason for offshore investment, Wayne Sorour, head: Old Mutual International South Africa, says that from a South African perspective, investors are investing in more stable economies for better returns, a wider choice of investment options and as a currency hedge.
“For instance, if investors wanted to invest in the pharmaceutical sector on the FTSE/JSE; the options are limited to three companies, namely Aspen, Ascendis and Adcock Ingram. However within global markets, there is a selection of over 60 pharmaceutical companies, and that’s just on the London Stock Exchange. Not only do your investment options increase exponentially, but investors are also able to hedge against the volatility of the rand.”
Sorour adds that in terms of returns, foreign equities are also attractively priced relative to bonds and cash. “As a result of the low interest rates, investors can currently receive better returns from equities than government bonds and money in the bank.”
Given the recent uncertainty surrounding many of the universities in South Africa, Sorour says that increasingly high-net-worth individuals are opting to fund future international study plans for their children by investing offshore. “At the moment, a big concern for many is whether a degree obtained from a South African university will carry the same international recognition going forward as it has in the past. Parents are therefore increasingly opting to make provision for their children to study abroad if they wish to do so.”
When looking to make an offshore investment, Sorour says that investors essentially have two options to consider. “They can invest directly, or via a rand-denominated offshore or asset swap fund. Investing directly offshore may seem like the simplest method, however, this option requires tax clearance and various other forms of approval, making it a slightly more onerous process.
“For investors seeking more favourable returns due to current market conditions with a rand hedge, an asset swap fund should be considered, whereby returns are based on the movements of another currency, but paid out in the base currency (i.e. the rand for South African investors). However, due to the ease of this process, the costs are often higher and the taxing method is less favourable when purchasing an asset swap.”
Sorour urges investors eager to explore their offshore options to consider more than just returns. In addition to potential returns, he says that the various investment structures available also need to be considered, as well as tax implications and estate planning consequences.
“All of these factors can impact the ultimate success of an investment. For example, if an investor, with offshore assets were to pass away, there may be consequences of not having an offshore will. This is where an advisor can add a great amount of value in determining what vehicle would be best for each specific client, based on their financial position and requirements.”
Ultimately, Sorour says that there is no “best” route or pre-defined portion of wealth that should be invested offshore, as this is dependent on the individual’s specific financial situation and goals. “Overall wealth, financial goals and family setup are just some of the factors that impact what percentage assets should be invested offshore. An experienced financial adviser will be fully equipped to assess these factors and suggest a solution that is most suited to a particular situation.”
